The Australian dollar is in negative territory on Tuesday. In European trade, AUD/USD is trading at 0.6876, down 0.50%.
RBA minutes indicate concern over inflation
The Reserve Bank of Australia keeps getting in the way of the Australian dollar. RBA Governor Lowe appeared before a parliamentary committee last Wednesday and confirmed that further rate hikes were on the way as inflation was still unacceptably high. The Aussie responded by dropping 1.1%. The RBA minutes were released today and members expressed concern at the upside risk to inflation, noting that there was “more breadth and persistence” in inflation. The hawkish tone of the minutes has boosted rate-hike bets but the Australian dollar remains under pressure over concerns that the RBA is having trouble getting a handle on inflation, despite its aggressive rate-tightening cycle. Again, the Aussie has responded with losses.
How much higher will interest rates go? That will depend to a large extent on upcoming data, starting with Wednesday’s Wage Price Index for Q4. Wages are expected to have climbed 3.5% y/y in Q4, up from 3.1% and the highest level since September 2012. Wages are an important driver of inflation and higher wages will make it more difficult for the Bank to curb inflation.
The RBA minutes also indicated that members debated whether to raise rates by 25 or 50 basis points. Ultimately, the RBA opted for a modest 25-bp increase, which brought the cash rate to 3.35%. The money markets are projecting a terminal cash rate of 4.25% by August, which means that the RBA will likely be busy in the coming months.
We’ll also hear from the Federal Reserve on Wednesday, with the release of the minutes from the February meeting. The Fed didn’t have any surprises and raised rates by 25 basis points. The markets will be looking to see how close the Fed was to hiking by 50 basis points. If the rate decision was a close call, the US dollar could continue to rally.
- AUD/USD is testing support at 0.6907. Below, there is support at 0.6784
- There is resistance at 0.7001 and 0.7124